Strong Rupee, weak crude oil may put pressure on gold prices; MCX support at 49800, ECB monetary policy eyed

Strong Rupee, weak crude oil may put pressure on gold prices; MCX support at 49800, ECB monetary policy eyed

By Jigar Trivedi

Comex gold held just below $1,700 an ounce on Friday and finished fifth straight month on a lower side, pressured by strong US economic data that reinforces the Fed’s aggressive stance against inflation, having committed itself to keeping interest rates higher for longer. Manufacturing activity in the US grew steadily in August despite weakness in other major economies. Latest US employment data also remained solid. Elsewhere, eurozone inflation rate hit a new record high of 9.1% in August on high energy prices, bolstering speculations for a supersized 75 basis point rate hike from the European Central Bank next week despite recession worries. While gold is widely considered as a hedge against inflation and economic uncertainty, higher interest rates raise the opportunity cost of holding non-yielding bullion, denting its appeal.

Source: TickerPlant

The yield on the 10-year US Treasury note rose toward 3.3%, the highest in two and a half months and slowly approaching a 3-½-year high hit in May. The latest data showed weekly jobless claims fell unexpectedly to a 9-week low at the end of August, suggesting the economic slowdown is not yet triggering widespread job losses. Some Fed officials have been reiterating the fed funds rate needs to raise to at least 4% by early next year and stay there to curb soaring inflation, in line with recent comments from Fed Chair Jerome Powell. Money markets are now pricing a 77% chance the Fed will hike rates by 75 bps at its September meeting.

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(Source: SPDR)

Holding at the SPDR Gold ETF declined to 973 tonnes as on 31st August as compared to 1,006 tonnes as on 1st August and 975 tonnes as on 1st January 20922.

The greenback advanced to multi decade high

(Source: Tradingview.com)

The dollar index firmed up near 20-year highs above 109.5 and is on track to gain for the third straight week, as investors held onto dollar positions ahead of a highly-anticipated monthly jobs report that could reinforce the Federal Reserve’s aggressive stance against inflation.

US Federal Reserve Chair Jerome Powell delivered a stern commitment to combat inflation with higher interest rates in a policy speech at the Jackson Hole conference. Powell warned strongly against prematurely loosening policy amid data showing possible signs of peak inflation, noting that the Fed’s focus is broader than a month or two of data and that it will continue pushing ahead until inflation moves down closer to its 2% target. ECB policymakers also made the case for a more aggressive response against surging inflation, and are reportedly discussing a bigger 75 basis point rate hike in September.

Looking at the current scenario of a high dollar index and an aggressive monetary policy stance, we believe the yellow metal may decline further. Comex gold has a strong support near $1,680 / $1,670 an ounce. We may see a rebound in the prices however strong rupee on the back of weak crude oil and a timely RBI intervention may put an additional pressure on the yellow metal. MCX Gold October futures may find support near Rs. 49,800. Next week is a holiday shortened in the US due to Labor day on Monday. Eyes will be on the 8th September ECB monetary policy. We don’t rule out the possibility of a rebound, but the undertone is bearish in the yellow metal.

(Jigar M Trivedi, Senior Analyst Currency & Commodities, Reliance Securities Limited. Views expressed are the author’s own.)